Survival of fittest as legal firms adapt to ever-changing world

LAW is big business. The UK legal market was worth an estimated £25.6bn in 2011.

LAW is big business. The UK legal market was worth an estimated £25.6bn in 2011.

However, the legal profession is undergoing a period of unprecedented change:

Liberalisation of the market

Since October 2011 and the introduction of Alternative Business Structures you no longer need to be a lawyer to own a law firm. The opening up of the market is intended to give greater choice to consumers of legal services and ensure more competitive pricing, leading to the nickname “Tesco law”. In fact Tesco has not (yet) entered the legal services market and it is the Co-Op supermarket that has set itself the goal of being the biggest provider of legal services by 2022.

The ABS structure also allows law firms to seek external investment

James Caan recently invested in two law firms and gambling entrepreneur Bert Black of Betfair has invested heavily into Leeds-based Brilliant Law, a firm founded by non-lawyers. The thinking is that applying non-lawyer management processes to law firms will make them more profitable. The concern among lawyers is that their client-first approach will be trumped by a requirement to achieve returns for the investors.

The Legal Aid, Sentencing and Punishment of Offenders Act (LASPO) comes into force in April

This act introduces most of Lord Justice Jackson’s recommendations aimed at bringing legal costs under control. Referral fees are banned come April, transforming the way personal injury lawyers do business. Lawyers will no longer be able to pay for the claims referred to them by insurance companies and claims management companies. Success fees (the uplift on legal fees which underpins the business model of “no win, no fee”) and the insurance premiums for insuring against the risk of paying the other side’s legal costs will no longer be recoverable from the losing party. The widely held view is that insurance companies will soon launch ABS law firms so that profits lost from the banning of referral fees are made up by profits earned on the personal injury legal work. However, as the Jackson reforms also introduce a new draconian fixed costs regime, it is estimated that profit margins on personal injury work will be lowered by at least 20%.

LASPO also cuts £350m from the £2.2bn legal aid scheme from April by removing funding for most cases involving divorce, child custody, clinical negligence, employment, immigration, housing, debt, benefits and education. According to the UK Government’s own estimate, 623,000 people will lose out on advice. Law firms previously doing legal aid funded work, Citizens Advice Bureaux and law centres will suffer a significant drop in work and access to justice for the poorest in society will be reduced.

Technology

Legal information is readily available for free on the internet for those willing to take the time to do their own research.

There has also been an increase in “self service” legal advice where consumers pay a fixed fee and download precedent documents to tailor to their own requirements without any input from a lawyer.

Recession.

We’re grinding our way through the slowest recovery from recession in the past 100 years.

The twin threats of competition and change are a challenge for businesses in all sectors. Maura McGowan QC, chairman of the bar council, recently commented that lawyers, like sharks, have to keep moving to survive.

Or as another Darwin might have put it: “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change.”

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